Apple’s retail expansion is about how it can emerge from its own shadow

By Andria Cheng

( Correction: The story has been updated after Apple clarified that its plan to triple its retail store count is only in China, not globally.)

When Apple Inc. Chief Executive Tim Cook discussed Wednesday the tech giant’s retail ambitions, a part was buried in the Q&A session.

While he spoke of tripling the number of stores in two years, Apple spokesman Steve Dowling clarified on Thursday that Cook was only referring to Greater China, where the company has 13 stores, not worldwide, as many reports had presumed. Apple has 424 stores, including 255 in the U.S. The company has opened its first stores in Brazil and Turkey to expand its geographic footprint to 15 countries.

Apple grew its retail sales to $20.2 billion last year, or 12% of the company’s total, from $14.1 billion in 2011. In the U.S., its share in the specialty electronics retail space also has surged to 15%, making it No. 2 player in the category, from 10.8% between 2011 and 2013, while Best Buy’s share has dropped to 31.3% from 32.7% during the same period, according to Euromonitor International data.

The company’s retail sales in the quarter ended March 29 actually dipped slightly to $5.23 billion, or 11% of Apple’s total sales, from 12% a year earlier. In fiscal 2013, the retail segment’s operating profit dropped 13% to $4 billion as gross margin declined, according to the company’s annual filing in October.

At that time, Apple said it planned to open about 30 stores this year, with two-thirds of those being overseas. The company cited among its risk factors its “substantial investment and commitment of resources” for the retail segment. The company said in that filing that it has planned $11 billion in capital spending this year, including $550 million for retail facilities. Its future minimum lease payments as of Sept. 28 totaled $3.5 billion alone related to leases for retail space.

“Apple is still an iconic, exceptional brand,” said Customer Growth Partners President Craig Johnson in an interview. “It’s the biggest style-setting brand. But the stores aren’t providing the compelling range of newness that they did a year or two ago. The brand is a little dated. It’s not as novel anymore.”

Johnson, whose firm advises both retailers and institutional investors, said his 16-person field team’s Apple store checks in the U.S. and U.K. in more than 60 shopping venues found that Apple retail store sales had peaked, as comparable sales have declined “significantly” for the first time. He estimated same-store sales dropped by 5%, hurt by both fewer store visits and the percentage of shoppers making purchases. He said the decline marked the first significant drop his firm has observed since it began detailed tracking of Apple store performance three years ago. He said it also marked the first big drop since Apple opened its first stores more than a decade ago.

The company’s retail sales per selling square footage on an annualized basis has declined to $4,410 in the first half of this fiscal year, from $4,650 in 2013 and $5,230 in 2012, Johnson said. To be sure, that’s still the highest among all major retailers. The comparable figure for Michael Kors/quotes/zigman/7705184/delayed/quotes/nls/korsKORS, an industry outperformer, is $2,000. Best Buy last year generated about $775 sales per square foot, Johnson said.

“Any other retailer in the world would give their left arm” for $4,000 in sales per square foot, Johnson told MarketWatch. Still, “the stores aren’t as productive as they used to be. To keep expanding in the U.S., they may not always have the tier-1 locations. [But] internationally, the brand has a lot of legs. There’ll be appetite for physical Apple stores in Asia and all over the world. The question is at what pace do you expand?”

As former Burberry CEO Angela Ahrendts formally joins the Cupertino, Calif.-based company next week to head retail operations, all eyes will be on how she plans to write Apple’s next retail chapter.

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About Behind the Storefront

Behind the Storefront is a blog about all things retail. It’s aimed at investors, shoppers and anyone else with a passion for learning about what drives consumer behavior. Hosted by Andria Cheng, Behind the Storefront will cover the business, brands and shopping behavior that’s behind some of the biggest companies, and largest employers, in the world. You can reach Andria at Acheng@marketwatch.com.